Iceland Upgrade Sure Makes Default Look Palatable

A friend commented to me when he saw the story that Iceland had been upgraded by Fitch, the ratings agency, that this “sure makes default look palatable”. Obviously, Iceland is not out of the woods yet but their relative success says there are other ways to get it done.

Iceland is safe to invest in again, according to Fitch, which has upgraded its credit rating three years after its economy spectacularly collapsed.

Fitch raised Iceland’s sovereign rating by one notch, to BBB- from BB+, meaning that the country’s debt is now “investment grade”.

Iceland’s economy imploded under a mountain of debt in 2008, forcing an International Monetary Fund bailout.

Since then, the debts of its neighbours have sparked a crisis in the eurozone.

Fitch said the decision “reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness”.

In 2008, its three banks failed under their enormous foreign debt, which at one point was larger than the Icelandic economy.

The value of the Icelandic krona plunged, which made its exports more competitive. The new government of 2009 was allowed to carry on borrowing and spending for another year before spending cuts kicked in.

I think the January headline from the Irish Independent that Iceland fared better than us by letting its banks fail makes sense. The lesson from Iceland is most applicable to Ireland since its core problem was a banking crisis. Is it too late for Ireland on the bank debt front? Perhaps, but at a minimum, the Irish have been models of austerity, and to the degree they don’t meet their targets, they should be given a break via bank debt haircuts.